Banking data debate offers no easy answers

Keystone

To preserve its financial sector, should Switzerland launch a counter-attack asserting its sovereignty or take an active role in reducing the international pressure on banking secrecy? There are two main schools of thought on the matter.

So far, the answer has lain in taxing Swiss bank account holders at a fixed rate to preserve banking secrecy while ensuring they don’t evade taxes. But, Germany has officially rejected that model, and France calls it “amnesty for tax evaders”. Only Austria and Britain have signed withholding tax agreements with the Swiss.

For years, the European Union has demanded an automatic exchange of banking information with Switzerland. Such an exchange would require Swiss banks to send information about interest earned by its foreign clients to the respective countries’ tax offices.

The Organisation for Economic Co-operation and Development (OECD) hopes to implement the information exchange in the near term, and Switzerland and the United States are in the midst of implementing a similar exchange within the terms of the Foreign Account Tax Compliance Act (Fatca).

Luxembourg – one of Switzerland’s biggest allies in the fight over banking secrecy – will soon sign Fatca. In turn, Brussels will demand the same treatment from Luxembourg as a member country, which will increase the pressure on non-EU member Switzerland to introduce automatic data exchanges with the 27-nation bloc.

Exchanging data

Under the EU’s proposed model, banks would send data about the interest earned by their clients to each affected country’s tax authority. The customer’s name, address and the amount of interest earned would be passed on.

For the past eight years, 24 of the 27 EU countries have been automatically exchanging banking data for tax purposes. However, a March 2012 report shows less-than-encouraging results.

The system struggles to accurately identifying taxpayers, since a single taxpayer identification number (TIN) hasn’t been enforced.

And most EU countries, except Denmark, don’t know whether the automatic exchange of information has led to more honesty in paying taxes.

The information exchange has worked as a scare tactic, however. The fact that tax evaders know their data is headed into the hands of the tax authorities has led to a 40% increase in honest tax declaration, according to a US study.

In the hornet’s nest

Switzerland officially continues to cling tightly to the flat tax model wherein banks leverage a withholding tax on each foreign account and transfer it to the respective country’s tax authorities.

But, when the cabinet recently appointed a group of experts to come up with possible paths to a clean banking industry, the group considered the exchange of banking information as an option.

Finance Minister Eveline Widmer-Schlumpf’s statement a few weeks ago that Switzerland must broach the discussion about exchanging banking information brought harsh reactions from several political parties. Many argued the finance minister had stabbed the government in the back with her suggestion and said that she should be removed from her responsibilities.

Advantages for banks

“The attitude assumed 40 years ago of just waiting and reacting has not worked for four or five years now,“ Peter V. Kunz, professor of business and comparative law at Bern University, told swissinfo.ch.

“I think Switzerland missed the chance to alter its strategy, but it’s not too late. I think we need a proactive solution and I hope that the group of experts will make suggestions that go in that direction.”

To Kunz, going in the right direction means embracing the exchange of banking information, which he says “especially has economic advantages for the affected banks. They can easily forward the requested data and don’t have to make calculations and send the money, as the flat tax system would require.”

A flat tax system

Because of the massive pressure on banking secrecy, Switzerland wants to sign tax agreements with as many countries as possible which address the tax evasion problem with a withholding tax. Under that model, bank clients’ identities remain anonymous.

However, the OECD and the EU would like to implement the automatic exchange of bank client data.

So far, Switzerland has reached withholding tax agreements with Austria and Britain, both of which have been in effect since January 1.

A similar agreement with Berlin failed after the German parliament voted it down. A French withholding tax agreement with Switzerland also seems to be at risk of failing.

Negative experiences

But, bank expert Martin Janssen doesn’t see things quite the same way. To him, there is no compelling reason to introduce an information exchange instead of a withholding tax.

“We are ready to send the money. If other countries don’t want it, then it has nothing to do with money, but with the repression of their citizens. We don’t have to give in to that.”

A 2012 report shows that the EU’s banking information exchange system has, so far, been fraught with negative outcomes. Not all countries have implemented it as required, and in many places, the tax authorities are unable to keep up with the volume of data involved.

“Most countries already fail in the evaluation process,” says Mario Tuor, spokesman at the State Secretariat for International Financial Matters. “The biggest portion of the data affects real people, which is why it’s an enormous challenge to find all those who have evaded taxes. And, the data is sent in all sorts of different formats.”

Navigating the law

Tuor argues that a withholding tax system makes more sense because under it, “everyone is taxed, since you just take the taxes out. In contrast to the exchange of information system, not only interest but also dividends and other sources of capital are taken into account. Most of the work isn’t done by the foreign offices; instead, it’s done by Swiss banks.”

A withholding tax is also an intelligent way to address past financial indiscretions, adds Tuor. Janssen agrees and says it would also avoid complications from trying to prosecute tax evaders.

“It’s impossible to just send tax evaders back to their home countries for prosecution. That would be a breach of contract [under banking secrecy laws],” says Janssen.

Kunz calls the withholding  tax a “logical concept“ for those who have already evaded taxes, since it respects the banks’ promised confidentiality. If the withholding tax weren’t implemented, Switzerland would have to work out amnesty solutions with each affected person’s country, he points out.

(Translated from German by Veronica DeVore)